Money laundering – Latvia’s recent banking scandal | PKF Malta

The Malta Financial Intelligence and Analysis Unit (FIAU) has had a bumpy ride last year amid revelations that a number of confidential reports were leaked to the press concerning a number of politically exposed persons. FIAU has just published its informative annual report for 2017 which includes a detailed commentary on the number of investigated files, its legal powers and obligations.

Challenged by a number of local newspapers to reveal progress on spectacular files which were being leaked to the press targeting political engaged persons, FIAU replied that it is precluded by law from commenting. An intriguing case last year concerned the Maltese link in the Russian Laundromat scandal, which, quoting the media, amounted to around €3 million in allegedly laundered Russian funds having been transferred to Malta.

As more details surfaced in the tabloids, the case concerned four Maltese companies which received USD3 million in laundered Russian funds. This research was published by the Organised Crime and Corruption Reporting Project and it occurred over a period of five months ending January 2014. The lion’s share of laundered funds went to a firm named ASAP Equipment Limited, while smaller amounts were credited to Corinaro Trading Ltd; La Vida Enterprises Ltd and F.I.T. Ltd. The entire number of companies appear to be held by Maltese fiduciary firms.

However, readers may agree that this case is dwarfed in significance when compared to an investigative scoop which revealed thousands of suspects in the Panama and later on Paradise Papers. Moving on, we note how the connection with Russian funds surfaces after disclosures by The Organised Crime and Corruption Reporting Project particularly on the use of slush funds sheltering in Latvian banks.

Combing through company records, the investigative reporters tracked clients including rich and powerful Russians who made fortunes from dealing with the Russian state, including a businessman in the inner circle of Russian President Vladimir Putin, and includes IT distributors in Russia, including those for Apple and Samsung.

The scandal of Latvian banks seems to have sent many ripples on the surface that rocked the EU regulators. This shocking revelation is amplified by a recent report on a Latvian bank disclosed by the US Treasury which alleged widespread money laundering at ABLV Bank AS – one of Latvia’s largest lenders.

Recently Latvia’s anti-corruption agency detained Ilmars Rimsevics, a governor of the country’s central bank and a member of the ECB’s governing council, on suspicion of securing bribes. It claims an alleged link to Putin and his daughter which in turn triggered the latest scandal tarnishing the Latvian banking sector. Again, the Latvian anti-money laundering unit could not provide additional information, such as how deep the investigation went and who the suspect account holders might be – as one might obviously suspect – not actually held in the names of Putin’s daughter. It is pertinent to observe that many cases involving suspicions on money laundering are complex and require trained investigators working in complete harmony with the police department.

It appears that Latvia suffers from a deficit of qualified investigators and police officers to tackle such cases involving international connections. Not surprisingly, this begs the question – why is the number of investigated cases so comparatively low in Latvia? Quoting statistical facts there were 231 money laundering cases registered in 2015 and a mere 120 in 2016.

Paradoxically as reported in other small EU countries, only 10% of such cases in Latvia make it to court. Courts received 13 such cases in 2014, six in 2015 and only four in 2016.  It is rather perplexing how none of those criminal cases taken to court involve international crimes.

A spectacular scandal occurred in another Latvian bank where a long-serving central bank chief, was recently detained on suspicions of soliciting a €100,000+ bribe from an unidentified bank. Released on bail, the suspect banker immediately faced new allegations, from the Anglo-Russian owner of Latvia’s Norvik Bank, who accused him of repeatedly trying to solicit bribes.

A classic case revolves around the US Treasury which had accused ABLV, Latvia’s third-largest bank, of “institutionalised money laundering”, including handling transfers that ended up with entities linked to North Korea’s nuclear programme. ABLV has denied money-laundering, but last month requested a €480m emergency loan from the Latvian authorities to help it survive proposed US sanctions.

Having examined the fate of Latvian economy and its susceptibility to money laundering, let us compare how our own FIAU stands.

The FIAU has been in the headlines over the past three years following its investigation based on facts revealed by the Panama Papers and the money-laundering allegations on the suspended Iranian bank Pilatus. A leaked extract of another FIAU report found evidence that the local company behind the LNG tanker which allegedly transferred money to a Dubai-based company called 17 Black, was the “target client” of two Panama companies.

Upon reflection, Pilatus bank was introduced to the banking regulators in 2012 by KPMG who successfully obtained its banking licence and acted as its auditors up till the day when the licence was suspended by MFSA following the incarceration of its chairman by the US courts. From further reading of FIAU annual report for 2017, one observes an interesting array of statistics. Primarily one notes that reported and investigated cases have increased last year with no fewer than 778 suspicious transaction reports (STRs) submitted.

In percentage terms this equates to a 38% increase over 2016 and a 177% increase over 2015. These STRs gave rise to 702 cases, which is a substantial increase in comparison to the 520 cases in 2016 and the 219 cases in 2015. It was the credit institutions which were on top in the category that submitted the most STRs, with a 16% increase over 2016.

The majority of these reports originated from two banks within this category of domestic banks and predominantly involved foreign, legal and natural persons having no connection to any Maltese natural or legal persons. As was the case in 2016, the FIAU noted a significant increase in the number of STRs received from remote gaming companies.

One observes that the predominant typology in the remote gaming industry was the fraudulent use of pre-paid cards, which featured in over 27% of the STRs made, as well as stolen identification details. The use of pre-paid cards highlighted a sector-specific method of money laundering in the remote gaming sphere.

In conclusion, Latvia banking reputation has been tarnished and one expects that in the future a higher number of reported STRs are investigated since in the past only 10% of cases ended in court.

By contrast, FIAU forwarded 34 cases to the Police for further investigation, following a determination of reasonable suspicion of money laundering / funding terrorism, which equates to 6% of all the cases concluded in 2017. The Unit reaffirms that it never abdicated its responsibility and always carried out its functions objectively and with integrity.

George M. Mangion

[email protected]

The writer is a partner in PKF an audit and advisory firm.